The purchase price of a commercial property reflects what a buyer knows about it at the time of signing. Due diligence is the process of making sure that picture is complete before the deal becomes irrevocable.
Commercial real estate transactions in Ontario move quickly once an offer is accepted. Conditions are negotiated with finite timelines. Lawyers are instructed, lenders are engaged, and both parties move toward a closing date that was agreed to before anyone had looked carefully at what was actually being transferred.
Due diligence is the structured legal and factual investigation that happens within that window. It is the buyer’s opportunity to verify that the property is what it appears to be, that the seller’s representations are accurate, and that there are no encumbrances, liabilities, or regulatory complications that would affect the value of the acquisition or the buyer’s ability to use the property as intended.
Done properly, due diligence does not just protect a buyer from unpleasant surprises after closing. It informs the negotiation. Issues identified during the due diligence period can support price adjustments, additional representations and warranties, holdback arrangements, or in serious cases, a decision not to proceed at all. The condition period is the buyer’s leverage. Once conditions are waived, that leverage disappears.
This guide walks through the core components of commercial real estate due diligence in Ontario, explains what each involves, and identifies the issues that experienced buyers and their lawyers look for at each stage.
Title Searches
A title search is the foundation of commercial real estate due diligence. Through Ontario’s land registry system, a lawyer searches the title to the subject property to identify and verify all registered interests that affect ownership.
A commercial title search covers registered ownership history, outstanding mortgages and charges, liens, easements, rights of way, restrictive covenants, and any other interests registered against the property. Each of these can affect the buyer’s ability to use, develop, finance, or eventually sell the property.
Mortgages and charges must be discharged at or before closing as a condition of a clean title transfer. Easements and rights of way run with the land and transfer to the new owner, so understanding their scope and practical effect on the property is essential before committing to the purchase. Restrictive covenants limiting use of the property, which are common in older subdivisions and commercial developments, must be reviewed to confirm they are consistent with the buyer’s intended use.
For commercial properties, title searches also identify whether the property forms part of a condominium corporation, whether there are any shared facilities agreements or cost-sharing arrangements registered on title, and whether any prior owners registered instruments that continue to affect current or future use.
Off-Title Searches
A title search confirms what is registered on the property. Off-title searches go further, uncovering information held by government bodies and public authorities that can affect the property but does not appear on title.
Standard off-title searches for a commercial acquisition in Ontario typically include:
- Property tax searches: confirming that property taxes are current and identifying any arrears that must be resolved before closing.
- Municipal work orders and building permits: identifying any outstanding work orders, open building permits, or property standards violations that the current owner has not addressed and that may transfer to the buyer as obligations.
- Conservation authority searches: determining whether the property is subject to conservation authority regulations, floodplain restrictions, or development constraints that affect its use or development potential.
- Utility and easement searches: confirming the location and scope of utility easements and any outstanding assessments from local improvement charges.
- Zoning confirmation: verifying the current zoning designation through the relevant municipality, as described in more detail below.
The scope of off-title searches is tailored to the property type, location, and intended use. A lawyer advising on a commercial acquisition will assess which searches are necessary based on those factors and on any representations made by the seller in the purchase agreement.
Zoning and Land Use Review
Zoning is one of the most critical due diligence items in a commercial acquisition, and one that buyers sometimes underestimate until a problem surfaces after closing. A property’s zoning designation determines what uses are permitted, what can be built, how the property can be subdivided, and what conditions apply to any proposed development or change of use.
A zoning review begins with confirming the current zoning classification from the applicable municipality’s zoning by-law and comparing it against the buyer’s intended use. Permitted uses are not always as broad as they appear in general descriptions; the specific provisions of the zoning by-law govern, and uses that are technically within the zone may require a minor variance or site-specific zoning amendment to proceed.
For buyers intending to redevelop or significantly alter a property, the review expands to consider official plan designations, applicable secondary plans, heritage overlay requirements, and any known municipal planning intentions that could affect the property’s future development potential. In Ontario’s major urban markets, these planning considerations can significantly affect the value of a commercial acquisition and the timing of any planned development program.
Non-conforming uses are a particular area of concern. If the current use of a property is non-conforming under the applicable zoning, that use may be protected as a legal non-conforming use but will not necessarily transfer to a new buyer in the same protected way. Buyers assuming the continuation of a non-conforming use without legal confirmation of its status are assuming a risk that may not be reflected in the purchase price.
Environmental Assessment
Environmental due diligence is a specialized but essential component of commercial real estate acquisitions in Ontario, governed in large part by the Environmental Protection Act. The core concern is Phase I and Phase II environmental site assessment.
A Phase I Environmental Site Assessment (ESA) is a historical review conducted by a qualified environmental professional. It examines the history of the property and adjacent lands to identify potential sources of contamination, including prior uses such as gas stations, dry cleaners, manufacturing operations, or storage of hazardous materials. A Phase I ESA does not involve physical testing of the soil or groundwater; it identifies areas of potential concern that warrant further investigation.
Where a Phase I ESA identifies areas of potential concern, a Phase II ESA is recommended. A Phase II involves physical sampling of soil and groundwater to determine whether contamination is actually present and, if so, its nature, extent, and likely remediation cost. Environmental remediation in Ontario can be enormously expensive, and liability for contamination under the Environmental Protection Act can extend to current owners regardless of when the contamination occurred. Buyers who close without adequate environmental due diligence assume that liability directly.
Lenders routinely require Phase I ESAs as a condition of financing commercial acquisitions, and many require Phase II assessments where the Phase I findings warrant it. Even where a lender does not require it, a buyer’s own interests almost always do.
Lease Review and Estoppel Certificates
For income-generating commercial properties, existing leases are among the most important documents in the due diligence package. The revenue stream that justifies the purchase price flows from the leases, and the terms of those leases determine the stability, enforceability, and duration of that revenue.
Lease Review
A thorough lease review for a commercial acquisition examines each tenancy for rent amount, rent escalation provisions, lease term and renewal options, permitted use, assignment and subletting rights, termination rights, tenant inducements and whether they have been fully discharged, capital contribution obligations, maintenance and repair responsibilities, exclusivity provisions, and any side agreements, amendments, or letters that modify the base lease terms.
The review also considers whether any leases are in default, whether any tenants have exercised or have the right to exercise renewal options, and whether any lease terms are materially inconsistent with the seller’s representations about the income profile of the property.
Estoppel Certificates
An estoppel certificate is a document signed by a tenant that confirms the current status of their lease. It sets out the commencement date, expiry date, current rent, any rent arrears, any defaults by either party, the status of renewal options, and any claims the tenant has against the landlord. The tenant’s signature on the estoppel certificate creates an estoppel: the tenant is legally bound by what they have confirmed, and cannot later take a position inconsistent with the certificate’s contents.
Estoppel certificates serve two functions in a commercial acquisition. First, they verify the seller’s representations about the tenancies and provide independent confirmation of the income stream the buyer is acquiring. Second, they bind the tenants to the disclosed position, protecting the buyer against post-closing claims based on facts the tenant certified did not exist at the time of closing.
Buyers acquiring income-producing commercial properties should insist on estoppel certificates from all material tenants as a condition of the transaction. Tenants who refuse to provide estoppel certificates, or who provide them with significant qualifications or reservations, are a due diligence signal that warrants further investigation before conditions are waived. For a deeper treatment of estoppel certificates, see our dedicated article on the topic.
Financial Review of Income-Generating Properties
The financial review of a commercial income property is distinct from but closely related to the lease review. Where the lease review confirms the legal terms of the tenancies, the financial review examines whether the actual income and expense performance of the property is consistent with the representations made by the seller and with the assumptions underlying the purchase price.
Key items in the financial review include:
- Rent rolls: a current, detailed listing of all tenants, their lease terms, rent amounts, and any arrears. The rent roll should be reconciled against the actual leases reviewed.
- Historical operating statements: typically three years of actual income and expense data, reviewed against the rent roll and the lease terms to identify any inconsistencies, unusual expense items, or trends that affect the property’s forward performance.
- Operating cost reconciliations: for net lease properties, a review of the landlord’s operating cost statements to confirm that costs are being allocated to tenants in accordance with lease terms and that no inappropriate costs are being included in the pool.
- Capital expenditure history: a review of significant capital expenditures over the prior three to five years to identify deferred maintenance, recurring systems failures, or upcoming capital obligations that the buyer will inherit.
- Insurance claims history: significant or recurring insurance claims can indicate building condition issues that are not visible in a routine inspection.
The financial review is typically led by the buyer’s accountants or financial advisors, but the legal team needs to understand its conclusions in order to assess the adequacy of the representations and warranties being given by the seller in the purchase agreement and the appropriate scope of any indemnity provisions.
Building Condition Assessment
A building condition assessment (BCA) is a professional inspection of a commercial property’s physical condition, typically conducted by a building engineer or qualified consultant. Where a home inspection is standard in residential transactions, a BCA is its commercial equivalent, though considerably more comprehensive in scope.
A BCA examines the building structure, building envelope, roofing systems, mechanical systems (HVAC, plumbing, fire suppression), electrical systems, elevators and other vertical transportation, parking structures, and site conditions. It identifies current deficiencies, components approaching end of useful life, and deferred maintenance that will require capital expenditure over a defined projection period, typically ten years.
The BCA’s capital expenditure projections are directly relevant to pricing. If the BCA identifies $500,000 in near-term capital requirements that were not disclosed by the seller, that finding supports either a price adjustment or a specific indemnity in the purchase agreement. Buyers who waive conditions without a BCA are making assumptions about the physical condition of a building that can be very expensive to revisit after closing.
PPSA Searches
A search under Ontario’s Personal Property Security Act (PPSA) is a standard component of commercial real estate due diligence that is sometimes overlooked by buyers focused on title and physical condition. A PPSA search identifies security interests registered against personal property associated with the property, including fixtures, equipment, and in some cases business assets that form part of the acquisition.
For a buyer acquiring a property that includes significant equipment, mechanical systems, or tenant improvements that may have been financed separately, a PPSA search can reveal security interests that encumber that personal property and that the buyer would inherit if not discharged before closing. Common examples include equipment leases, conditional sales contracts, and general security agreements granted by the seller or a prior owner to their lenders.
PPSA searches are also relevant where the acquisition includes any element of business assets alongside the real property, as in the purchase of a commercial property that includes an operating business or a portfolio of equipment integral to the property’s function.
Survey and Boundaries
An up-to-date survey confirms the legal boundaries of the property, the location of any easements or encroachments, the footprint of existing improvements relative to the lot lines, and the dimensions of the property against those described in the purchase agreement. For commercial properties, a survey also identifies setback compliance, parking ratios, and any physical encroachments by or onto neighbouring properties.
Where the seller’s existing survey is outdated or does not reflect current improvements, a new survey may be warranted as a due diligence condition. Discrepancies between the survey and the representations in the purchase agreement should be resolved before conditions are waived, as they can be very difficult to address after closing.
Pulling It Together: Due Diligence as a Negotiating Tool
Due diligence is not simply a checklist of searches and reviews completed to satisfy a lender or a standard of professional practice. Its findings are the factual foundation on which the final terms of the transaction should rest.
Issues identified during due diligence support specific responses depending on their nature and materiality. Environmental contamination may support a price reduction, a remediation holdback, or an indemnity from the seller. A deficient BCA may justify a capital expenditure credit or a renegotiated closing schedule. Lease documentation that does not match the seller’s representations gives the buyer grounds to require additional representations, a price adjustment, or specific post-closing protections.
The condition period in a commercial purchase agreement should be long enough to complete the due diligence program the buyer actually needs for the specific property. Compressed timelines that do not allow for adequate Phase II environmental work, thorough lease review, or a proper BCA are a risk that buyers sometimes accept under competitive pressure, only to discover after closing that the cost of that decision is substantial.
Experienced legal counsel coordinates the due diligence program, synthesizes the findings, advises on their legal implications, and ensures that the purchase agreement reflects the results before conditions are waived. That coordination is where the value of specialist commercial real estate legal advice is most clearly demonstrated.
Acquiring a Commercial Property in Ontario? Speak With Our Team.
At Goldstein & Grubner LLP, our commercial real estate lawyers coordinate due diligence programs for buyers across Ontario, acting on transactions involving retail properties, office buildings, industrial assets, multi-tenant developments, and commercial land. We advise on the scope of due diligence appropriate for each acquisition, manage the review process, and ensure that the findings are properly reflected in the purchase agreement before our clients commit.
Contact our office to discuss your transaction.
This article is intended for informational purposes only and does not constitute legal advice. The appropriate scope of due diligence varies with each transaction. For advice specific to your acquisition, please consult a qualified commercial real estate lawyer.
